Immediately below is an article I penned which was published in the 14 April edition of InnovationAus building on an earlier piece about the SERD’s recommendations about the RDTI.
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SERD and the RDTI: A match that still needs work
Earlier this month, InnovationAus published an excellent article by Dr John H. Howard entitled, SERD’s unanswered questions on business incentives. The article looked at three areas of concern regarding the recommendations about the reforms proposed for the R&D Tax Incentive (RDTI).
Firstly, an unprecedented extension of the well-understood definition of R&D for ‘premium’ startups. Secondly, a failure to cost the additional benefits proposed in the report. And thirdly, the narrow distribution of the recommended additional benefits to a smaller base of eligible taxpayers.
I certainly recommend the article and would like to add some additional observations.
First up, a confession. I’m an R&D tax consultant. Apparently, SERD isn’t comfortable with the role we play, citing the fact that 86 per cent of taxpayers seek advice when making claims as evidence that the program is too complex.
Many commentators have pointed out the irony that the SERD’s set of recommendations, rather than achieving simplification, appear to add several layers of complexity to the current program.
Incidentally, I would argue that another reason that companies seek advice is that it is tax. A discussion for another time.
The RDTI’s relationship with the SERD has been a vexed one. Failing to refer to it in SERD’s original Terms of Reference; and an Issues Paper that was subsequently published which only allowed for two word limited boxes of feedback.
The issues paper in question was at times incoherent, and yet it was that paper (with some refinements) that has formed the basis of the SERD’ s recommendations for changes to the RDTI.
Dr Howard correctly points out that the improved benefits recommended by SERD – extended definition of R&D and higher rebate rates for qualifying startups; increasing the refundability threshold from $20 million to $50 million; the removal of the $150 million annual expenditure claim – have not been costed.
He notes, “On any reasonable calculation, the cumulative cost of the SERD tax expenditure recommendations would be considerable and well above fiscal neutrality.”
However, equally uncosted are the impacts of two major cuts to the RDTI that were put forward – the elimination of taxpayers whose annual R&D threshold amount falls below $150,000 (incorrectly described in the SERD Report as a minimum project spend requirement).
On current figures, this would eliminate approximately 3,000 companies which SERD referred to as being ‘sub-scale’.
In addition, the report recommends that SMEs that cannot demonstrate year on year revenue growth equal to 5% + CPI per annum should be disqualified from the program.
It is perplexing to connect short term revenue outcomes to contemporaneously subsidised R&D expenditures, but that is what is being recommended. Several thousand companies could be excluded as a result.
Perhaps this is why the SERD panel could be so generous in adding value for high performing startups/SMEs and all of the big end of town?
Dr Howard is also concerned about the narrowing of the distribution of the additional benefits for startups to only those who meet the proposed 100 points test, based on the acquisition of ‘privileges’ such as VC backing, accelerator participation, IP holdings and university collaboration.
In other words, the chosen ones keep getting rewarded at the expense of the innovation mainstream under the changes. These concerns need to be evaluated as a priority.
Dr Howard proposes an alternative approach and that is “to leave the RDTI to do what it does well: reduce the cost of genuine experimental research and create a separate commercialisation instrument for the transition from lab to market, open to firms regardless of their investor profile and funded through a capped direct appropriation at $300 million to $500 million per year.”
I see genuine merit with this idea. However, I am not in agreement when he follows up with this comment:
“The simpler RDTI reforms proposed in the SERD, including deemed rates, reduced documentation, and quarterly cash advances within the existing legislative framework, should proceed. They would make a tangible difference to firms already in the system.”
Leaving reduced documentation to one side (which would be a good thing), deemed rates for Supporting R&D Activities and the introduction of quarterly cash advances raise a raft of issues.
The quarterly payments idea did get to an ATO discussion paper phase 15 years ago, as it was this exact proposal that helped get the Greens over the line in passing the 2011 RDTI legislation.
However, the complexity of the eligibility requirements posited in the discussion paper saw the idea very quickly shelved.
The advent of the R&D loan industry certainly makes the quarterly payments option worth revisiting but it can’t be simply enacted without extensive consultation and it will definitely add significantly to compliance costs.
And it is critical to remember that the current program provides the same rate of benefit for Core and Supporting R&D Activities so the distinction hasn’t been significant to date.
The introduction of a lower deemed rate for Supporting R&D Activities will establish a new battlefield for taxpayers and the two regulators, the Industry department and the ATO, that would be waged for years and would, no doubt, keep R&D advisers gainfully employed. Perish the thought.
It is clear there is much work to do before we can start to head towards legislative change, but this is work that is very much worth doing.
Finally, one thing that has been missed in this debate is the way in which the current program has been travelling. There’s been a dispiriting decline in the regulatory environment.
The establishment of the fact that the ATO can independently determine the eligibility of R&D activities and the restriction of DISR to formal audit work only has created an environment of increased uncertainty and negativity.
Many commentators have been highlighting the growing division around matters of interpretation between companies/advisers and the regulators, particularly since the commencement of the RDTI Joint Review exercise in late 2023.
It is hard to understand why basic eligibility arguments are still occurring 15 years after the program began, particularly with the legal precedents available in the case law.
Adding to the present concerns is the fact that the federal government has progressively shut down every engagement mechanism involving the market, including the RDTI Roundtable and the Stakeholder Reference Group. It is now only going to provide quarterly online updates.
Engagement has been the cornerstone of securing mutually acceptable outcomes in the R&D tax space for 25 years and it has now withered away to virtually nothing.
Engagement and trust need to be the cornerstones of a thriving RDTI. After all, we all should want the same thing.
Companies, government and advisers should all be in the business of delivering eligible supportable claims that help to drive Australia as it seeks to meet the global innovation challenges identified by the SERD.
Is that a heavenly match too much to ask for?